In turbulent financial conditions, it is often difficult to accurately value a publicly traded stock asset. Similarly, it is difficult to examine the stock prices for two companies and determine the causes for the differences or similarities in the stock prices.
As displayed in Tables 1-4, there are numerous known financial measurements that can be used to evaluate a company's financial performance and health.
TABLE 1Liquidity RatiosRATIOFORMULAPURPOSE OR USECurrent ratio      Current    ⁢                  ⁢    Assets        Current    ⁢                  ⁢    Liabilities  Measures short-term debt-paying ability Quick or acid-test ratio                              Cash          ,          marketable                                              securities          ,          and                                              receivables          ⁢                                          ⁢                      (            net            )                                    Current    ⁢                  ⁢    Liabilities  Measures immediate short-term liquidity Current cash debt average ratio                              Net          ⁢                                          ⁢          cash          ⁢                                          ⁢          provided          ⁢                                          ⁢          by                                              operating          ⁢                                          ⁢          activities                                        ⁢                                        average            ⁢                                                  ⁢            current                                                liabilities                    Measures a company's ability to pay off its current liabilities in a given year out of its operations
TABLE 2Activity RatiosReceivable Turnover      Net    ⁢                  ⁢    Sales                                Average          ⁢                                          ⁢          trade                                              receivables          ⁢                                          ⁢                      (            net            )                              Measures liquidity of receivables Inventory Turnover      Cost    ⁢                  ⁢    of    ⁢                  ⁢    goods    ⁢                  ⁢    sold        average    ⁢                  ⁢    inventory  Measures overall profitability of assets Asset Turnover      Net    ⁢                  ⁢    Sales        Average    ⁢                  ⁢    Total    ⁢                  ⁢    Assets  Measures how efficiently assets are used to generate sales
TABLE 3Profitability RatiosProfit margin on sales      Net    ⁢                  ⁢    income        Net    ⁢                  ⁢    sales  Measures net income generated by each dollar of sales Rate of return on assets      Net    ⁢                  ⁢    income        Average    ⁢                  ⁢    total    ⁢                  ⁢    assets  Measures overall profitability of assets Rate of return on common stock equity                              Net          ⁢                                          ⁢          income          ⁢                                          ⁢          minus                                              preferred          ⁢                                          ⁢          dividends                                                  Average          ⁢                                          ⁢          common                                                          stockholders            '                    ⁢                                          ⁢          equity                    Measures profitability of owners' investment Earnings per share                              Net          ⁢                                          ⁢          income          ⁢                                          ⁢          minus                                              preferred          ⁢                                          ⁢          dividends                                                  weighted          ⁢                                          ⁢          shares                                    outstanding            Measures net income earned on each share of common stock Price earnings ratio      Market    ⁢                  ⁢    Price    ⁢                  ⁢    of    ⁢                  ⁢    Stock        Earnings    ⁢                  ⁢    per    ⁢                  ⁢    share  Measures the ratio of the market price per share to earnings per share Payout ratio      Cash    ⁢                  ⁢    Dividends        Net    ⁢                  ⁢    Income  Measures percentage of earnings distributed in the form of cash dividends
TABLE 4Coverage RatiosDebt to Total Assets      Total    ⁢                  ⁢    Debt        Total    ⁢                  ⁢    Assets    ⁢                  ⁢    or    ⁢                  ⁢    Equities  Measures the percentage of total assets provided by creditors Times Interest Earned                              Income          ⁢                                          ⁢          before          ⁢                                          ⁢          interest                                              charges          ⁢                                          ⁢          and          ⁢                                          ⁢          taxes                          interest    ⁢                  ⁢    charges  Measures ability to meet interest payments as they come due Cash debt coverage ratio                              Net          ⁢                                          ⁢          cash          ⁢                                          ⁢          provided          ⁢                                          ⁢          by                                              operating          ⁢                                          ⁢          activities                                        ⁢                                        Average            ⁢                                                  ⁢            total                                                liabilities                    Measures a company's ability to repay its total liabilities in a given year out of its operations Book Value per Share                              Common          ⁢                                          ⁢                      Stockholders            '                                              Equity                  Outstanding    ⁢                  ⁢    Shares  Measures the amount each share would receive if the company were liquidated
Of these measures, two metrics commonly used to measure a company's performance are Return on Equity (as defined in Equation 1) and Return on Assets (as defined in Equation 2). However, as described below, results from these metrics are frequently misleading.
                              Return          ⁢                                          ⁢          on          ⁢                                          ⁢          Equity                =                              Net            ⁢                                                  ⁢            Income                                Shareholders            ⁢                                                  ⁢            Equity                                              (                  Eq          .                                          ⁢          1                )                                          Return          ⁢                                          ⁢          On          ⁢                                          ⁢          Assets                =                              Net            ⁢                                                  ⁢            Income                    Assets                                    (                  Eq          .                                          ⁢          2                )            However, it is often difficult to make meaningful comparisons of companies when using the above-described metrics in Tables 1-4, such as Returns on Assets and Equity, because of limitations in Generally Accepted Accounting Principles (GAAP) and international differences in accounting practices. For instance, Net Income, as used in Equations 1 and 2, is highly dependent on the accounting quality of earning measurements in that Net Income tries to capture non-operating income and expense and is, therefore, subject to companies attempting to manage earnings reports. There is also a wide disparity in the calculation of Net Income from one country to another. Furthermore, Net Income may be misleading because companies that have been highly acquisitive tend to have higher non-cash charges (e.g., amortization) that artificially result in lower new income. In the same way, the Assets and Equity values used in Equations 1 and 2 may vary because of international differences that create a wide disparity in how assets are recorded from country to country. Also, the Assets and Equity quantities may be misleading because of accounting anomalies, such as an acquisition in which a seller may sell fully depreciated assets [thereby having no accounting value to the seller] but a buyer may record assets equal to fair value at the time of purchase [thereby being a positive value in the buyer's accounting]. Similar problems also exist with the other known measures of business performance because of GAAP limitations and international differences in accounting practices.
To assist the public in valuing a company and thus valuing that company's stock, publicly traded companies may be legally required to provide various accounting and financial disclosures. For instance, most publicly traded companies in the United States are required to submit financial disclosure data to the United States Securities and Exchange Committee, which publishes this information online to the public. Specifically, the SEC requires all publicly traded companies (except certain foreign companies and companies with less than $10 million in assets and fewer than 500 shareholders) to file registration statements, periodic reports, and other forms electronically through the Electronic Data Gathering, Analysis and Retrieval (EDGAR) database. Anyone can access and download this information for free. For more information on EDGAR, please refer to http://www.sec.gov/edgar.shtml.
However, since statutes and regulations require a large number of filings from a large number of entities, the EDGAR database has grown to enormous proportions. As a result of the size of the EDGAR database and as a consequence of inconsistencies with respect to how different entities report similar matters, it is inherently difficult to analyze the EDGAR data in a meaningful way. Basic text searches can be performed, but meaningful data reduction is substantially hampered by inconsistencies and by the variety of reporting forms used to report similar information.
Financial data on many publicly traded companies is also available for a fee through commercial services such as Standard and Poor's Compustat database at www.Compustat.com or Thomson Financial's Global Access database at www.Primark.com. Many companies also publicly disclose various financial data to potential investors. However, as with the information on the EDGAR website, this information is difficult to comprehend without processing that requires a high level of skill and is typically time consuming, expensive, and labor intensive.
Much like investors, a company often faces difficulty and expense in analyzing its own stock performance. From the standpoint of businesses, it is also helpful to analyze stock performance to determine various value drivers (e.g., net sales, gross sales, profitability, market share, research and development expenditures, labor force size, cash holdings, fixed costs. debt load, manufacturing capacity, assets allocation, etc.) affecting stock values. By analyzing the performance of its stock and comparing this performance to the stock performance of competing businesses, a company may form a course of action that fosters value drivers that benefit stock value while minimizing the effect of value drivers deflating stock values.